How does 10% of GDP sound?

Bad policy always gets greeted with claps and cheers. Really bad policy usually gets thunderous applause on the yellow brick road to hell.. We’re witnessing government policy about to be enacted that I reckon will end up costing us 10% of GDP within the next decade. The guarantee wrap the government announced is still a work in progress but it looks as though the major part of the policy guaranteeing all deposits held with Australian financial institutions will go ahead. If you were ever looking around for an example of moral hazard there it is in stark clarity. In fact it’s the biggest example of moral hazard we will ever see in lifetimes unless of course the government decides to guarantee the asset side of bank balance sheets as well 😉

The money markets this week saw a large amount of deposits leaving the branches and subsidiaries of foreign banks which could leave quite a hole in the $100 billion deposit base thee firms used to hold as they are not guaranteed.

Does anyone at the top echelons in the government apparatus know any recent economic history? The US S&L crisis was created as a result of S&L’s having deposit insurance .The consequence of this actions was that they almost all pursued reckless lending practices in the full knowledge that they wouldn’t lose any deposits (as the US government was there as a door stop).

We now have the spectacle of a tiny credit union having a better credit rating than BHP, which has next to no borrowings. This is truly mind-boggling in its sheer stupidity and reckless behavior.

One or two lefty economists (I call them anti-economists) have suggested that reckless lending can be mitigated through stronger regulation. This is absolute bullshit of the worst order. The most highly leveraged financial institutions in modern history have been government owned or government influenced entities. Fred and Fannie were leveraged at 135:1, as there was an an implicit government guarantee. Worst still their assets were 100% concentrated in one asset class. It’s not unheard of to see government owned banks in Europe leveraged 50:1.

If anyone believes this government would prevent banks from the risky asset concentration I would love to see how he or she square the circle with the doubling of the new homeowners credit that was also part of the package to “save the economy”. Does anyone actually believe the government would prevent banks from lending to homeowners because of concentrated risk being created in bank balance sheets? It’s a preposterous idea.

There’s also no way the guarantee will be removed in three years time as that sort of thing is like an octopus wrapping itself around the victim. It will be next to impossible to remove as it will quickly become an integral part of the capital market and its removal could cause a default.

No, the only time the guarantee will be removed is when the losses become so big that the government won’t be able to hold back the water.

Here’s my gentleman’s bet. This action will cost the country 10% of GDP as a result of reckless lending. That will be our crash.

79 thoughts on “How does 10% of GDP sound?

  1. Yeah its a disgrace and there is no doubt about it. There are bailouts and bailouts and if they wanted some sort of bailout it ought to be something like they’ll rush the cash there in response to a run on the banks, but at lone shark interest rates. If the bailout was a truckload of cash at 20% in response to a run then that wouldn’t cause so much trouble.

    But I’d be interested to see why you think its going to cost 10% of GDP for three years of cover. You might be overestimating the importance of investment banks on the economy. If these investment banks that are losing their funds aren’t some sort of venture capitalists its hard to see how the move could cause so much damage so quickly.

    Ultimately a bailout period ought to be about hasty deleveraging. The problem with this 3 year unconditional cover is that it will likely cause the exact opposite.

  2. This action will cost the country 10% of GDP as a result of reckless lending.

    Just trying to follow your reasoning JC. You’re saying the banks will lend recklessly as a result of the deposit guarantee, that this will create a bubble that ends in a crash, and the cost of the crash will be 10% of GDP.

    That’s a big call.

  3. I know it’s a big call david. However the seeds of the next crash are being laid out right here, right now.

  4. This IS what partly caused the S&L crisis.

    There was also a changing inflationary environment which stuffed up asset-liability management and continual propping up of failed S&Ls, which may have contributed to an eventual recession (along with huge Federal deficits) which threatened the survival of all financial firms.

  5. I know Mark. My worry now is to figure out how the hell the Fed can finance close to US$2trillion this year and the next.

  6. It looks like after the hysteria has died down JC is now back on the right track.

    Consider if JC was exactly right. And we lost 10% of GDP via a new round of massive loans. While 10% of GDP might be lost my own debts would be easy to pay off and my asset would likely have become very valuable. So at the cost of 10% of GDP, a new breakout in crime and dependence, I’d be catapulted into a very sound position. This is the paradox of going after hard money. You’ve really got to want it for principled reasons. None of us is getting any younger and its very easy to wind up tailoring your view of the situation to what’s immediately best for you.

    You’ve got to want hard money for MORAL reasons as well as economic.

  7. If you are right, then we should see a gradual increase in leveraging among the banks. I assume the RBA or APRA already collect this information.

    What is the current level of leveraging among Aussie banks, and how do they compare to the US and other countries? (I assume they are much lower, otherwise the govt wouldn’t be claiming they are fundamentally sound).

  8. jc

    i hear the blanket guarantee is due to change shortly. a cap is likely to be introduced at say, $1mm. above that, an insurance premium will have to be paid but im not sure whether this premium will be funded by the saver or the bank.

  9. It depends upon what you mean by leverage. An understanding of Basel II capital requirements and extended (Du Pont) financial analysis will help (google both). A bank’s ROE = ROIF x ROFL (return on invested funds* funds levered).

    Hence you might be able to see that there is a difference between how much capital they lend out and how much of their deposits they lend out.

    Australian banks don’t technically have a set reserve ratio – but with the combination of Tier I and II capital, on paper it looks like 8% is minimum. Presently they are around 13% or 12.5%.

    So banks currently lend out about 7-8 times their capital but this might increase to 12 times under the guarantees.

    However, banks are currently levered 19-20 times deposits however and take about 1.0-1.1% margin, thus making 20-25% ROE annually. Here you can see here how moral hazard of deposit insurances really kicks in.

  10. “Capitalization” and “Leverage” are a moveable feast.

    Thats why its better to think in terms of cash-money and ponzi-money. Or cash and M1.

    Regulations to do with capitalization are really cartelization regulations. They are barriers to entry. They must be done away with and replaced by a slowly growing reserve-asset-ratio.

    And honest start-up bank ought to be able to function without a great deal of capital if the playing field is even and if all banks are 100% backed. Hence capitalization regulations are just a gift to the already established bigshots. They are unjust. A violation of the principle of equality before the law. A break on innovation. A hindrance to wealth creation.

  11. Graeme,

    You can be a *financial institution*, you just can’t call yourself a *bank* without $100 mln in capital, as per the legislation and regulation. You can even be an ADI and be involved in OMO.

    “Safe Money Savings & Loans” might thrive Graeme, except the marketing potential would be less attractive in the US.

  12. Yea Pom

    I heard that too. It still causes the distortion if it’s set too low and in my opinion they will set to low enough to still screw things up.

  13. Not relevant Mark. Its not as important what you can and cannot call yourself. The regulations are there. What is your point?

    And JC. Its important to define these things properly. Any talk of leverage and capitalization is inexact and misleading obscurantism. What is important is cash and the way it is pyramided upon. Don’t be a jerk.

  14. My point is that it is relevant. The regulation does no more than this. Basel II is not a barrier to entry any more than any other rule on baking will be – the only entry barrier free system is free banking.

    I am surprised and impressed by your switch to favouring this system. 🙂

  15. Its arbitrary regulation for the purpose of cartelization. What is your point? Are you in fact saying that Basel II amounts to NATURAL LAW?

    Regulations are valid if they act to clarify property rights. Basel II doesn’t come under that category. Its a deal that was designed for incumbent bankers. Its a rort.

    “The regulation does no more than this.” No more than what? Its a cronyist initiation of force. Its totally unacceptable. Its a barrier to entry and a restriction on how you are able to act. Preventing pyramiding of money is merely clarifying property rights of all players. But Basel II has got nothing to do with that. Its protecting the privileges of some incumbents over others.

    Look before Basel II was Basel right? Retrospectively called Basel I. Why is that? It didn’t work thats why. And when I was around it was the Global Limits System. Just a bunch of hacks guaranteeing themselves a tidy profit and us a trade deficit.

  16. Graeme,

    Banks currently or in the past have done better than what Basel Requires. The implication is that banks have more discipline than regulators think. If financial institutions can do so profitably, there is no barrier to entry. You are simply inventing an imaginary problem, as have the regulators.

    Unfortunately now, regulators are encouraging unpriced risk taking. Capital adequecy limits might get pushed to their legal limits.

  17. Is risk taking going to be encouraged by protecting depositors? I should have thought the controlling issue for the bankers is the risk to themselves and their shareholders. The deposit guarantee will only help them if structured to leave the bank in place. Surely the system will be a top-up after the depositors have exhausted their claims against the bank.

    Arguing against myself, I suppose that it does reduce the risk of a run and so the bankers will maybe think that they can cope with higher leverage without putting their solvency at risk from a run.

  18. Done better at WHAT? All that means is that the cartelization regulations give crony-town plenty of headroom while still providing a barrier to entry for start-up players.

    Its an initiation of force rather than a clarification of property-rights. So it has to go.

  19. “Is risk taking going to be encouraged by protecting depositors?”

    We’ve got to be careful of our wording here. “Risk”. Someone drops out of harvard to found a computer company. Maybe he’s burning his bridges.

    But letting banks pyramid is allowing for endemic malfeasance. Not to be confused with the aforementioned notion of risk. True entrepreneurs have certain goals but within that context they seek to reduce risk. Except under inflationary conditions where you might take on financial risk for the purpose of availing yourself of the benefits of asset inflation. But that is merely being caught up in the malfaesance side of the risk definition.

    What we are talking about with bankers taking risks is a sort of arms race of malfeasance since we have set ground rules which allow for non-wealth-creating exploitation of monetary inflation.

    This is a usage of the term “risk” where we wind up confusing the financial “geniuses” of Weimar Germany with the entrepreneurial geniuses of the time (like Bosch or Ford) who were quite different.

  20. “No Graeme, the point is there is no barrier to entry except if you want to call yourself a bank.”

    Basel II and all other regulations ARE barriers to entry. As is the ability of some people to avail themselves of the discount rate. Or Bernanke funnelling cheap loans to crony-town. They are all barriers to entry. If a regulation isn’t a clarification of property rights, or perhaps something to do with preventing physical harm, its a barrier to entry.

  21. “Is risk taking going to be encouraged by protecting depositors? I should have thought the controlling issue for the bankers is the risk to themselves and their shareholders. ”

    There is more than one balance sheet and two sides to every balance sheet and they call it a guarantee to depositers. But what it really is is a guarantee of ponzi-loans. And thats how it ought to have been explained.

    The fallout comes from it being a guarantee to ponzi-loans. If you look at it like that then JC is right on the money.

  22. Graeme, you sure are a triumph of hope over experience. Your comments are a rash all over this blog, and not one person seems to have been converted to your views.

    Of course the guarantee is for money borrowed by banks to then lend under FR conditions. It is not a guarantee of the loans you call ponzi loans. Incidentally, I’m sure somebody gave you the definition of ponzi, but you keep misusing it anyway.

    From Treasury announcement:

    “Guarantee of wholesale funding
    In order to support confidence in funding markets and continued lending by Authorised Deposit-Taking Institutions (ADIs) to Australian corporations, businesses and households, the Government will offer a guarantee on debt securities issued by Australian owned banks, locally incorporated subsidiaries of foreign banks, credit unions and building societies.

    Guarantee of deposits
    The Government has guaranteed the deposits in Australian owned banks, locally incorporated subsidiaries of foreign banks, credit unions and building societies for a period of three years.”

    See, it is a guarantee of borrowing by banks etc, not lending.

  23. Graeme,

    Any ADI can participate in the OMO. Your assertion that Basel II is a “barrier to entry” is absolutely rubbish.

    On the other hand, they are a needless regulation.

    A stupid rule about 100% backing would be cronyism for cheap gold producers. You want to subsidise Angola and China? Why?

  24. Its terrific to see at least one opinion piece that doesn’t applaud the guarantee.

    “shoring up the financial system” ?? Hah !

  25. Graeme – if you continue to turn every thread into a tirade against FR banking and Ponzi-schemes, you are back on moderation.

    Whether you are right or wrong is immaterial; the fact is that you are driving away ALS readers in droves by the tedious monotony of your comments. please keep your obsessions to your own blog.

  26. For goodness sakes Mark. Go and learn stuff. Of course capitalization requirements are a barrier to entry. They stipulate that you have to have money to make money in this business. Pretty much all regulations are barriers to entry. Did you just play hookie from all your lectures or something?

    Pommy. I’m going for definitional exactitude. If you guys start talking about capitalization and leverage you are just confusing yourself and others. Because these are not clear definitions. You have cash. And you have the ability to pyramid on top of that cash. Calling this leverage or confusing this with leverage is just dishonest.

    If you want to understand this subject you have to learn this stuff.

    Pedro what is your point. I’ve re-read your post and I can find no point. If it were just a guarantee of deposits that side of it wouldn’t cause the problems that JC is referring to. But its a guarantee of ponzi-loans. Hence its a massive moral hazard. Now thats just a fact pommy. Stop threatening to bathe yourself in ignorance and bad definitions.

  27. Graeme,

    The market is more disciplined that the regulators wish them to be. The capital adequecy requirements have not stopped anyone setting up an ADI or FI.

    On the contrary – you want 100% backing.

    Capitalisation and leverage are different things Graeme. That’s why there is Tier I and II capital, and why the Du Pont method is the best way to analyse bank performance.

  28. Did I say that they were the same? They are only similar in that they are a poorly defined moveable feast meant to befuddle the laity. You don’t know what they mean. When you refer to tier 1 and 2 these aren’t economic concepts. They are local regulations.

    Regulations in general are a barrier to entry. None so flagrant though as capital requirements. You’ve made the point already that the banks keep within their cartel regulations. So what? Why wouldn’t they? What is your point?

    I’ll take an example from Salerno. He reckons he was down at some car dealer and the fellas were laughing at the problems of their competitor General Motors. Seeing a competitor in trouble means rejoicing in some circles. It means more sales and success that you have driven your competitor to the wall. This is a bit nasty but from a competitive point of view its kind of nice to see.

    But when one bank goes bad the rest of the banks are in a fear and trembling that all of them will go down. So its pretty clear the structure and regulations are set up like a government supported cartel.

    Otherwise why the difference in attitude? Problems at Harley Davidson don’t pose a threat to Honda in a free market. But Lehman goes down and next thing Iceland is in deep trouble. And capital requirement cartelization regulations are a big part of that. Its not proper competition.

  29. “The market is more disciplined….” Stop right there. Blaspheme no more. Don’t be calling this morass of socialist money, welfarism and special priviledges “the market”. This fallacy seems to be a mania with Australian economists.

  30. Market participants are more disciplined than the Government legally allows them to be, with your so called “Ponzi scheme”. It certainly remains a market despite the regulation politicans heap upon it.

    This is not a barrier to entry. It is entirely possible to loan out money entirely through securitisation. All FIs can participate in OMO.

    It is only being an ADI these regulations affect. The barrier to entry is redundant as no bank thus far lends near what they legally are allowed to. They are more risk averse.

    It is sheer madness to complain about not letting banks with 1% CAR compete in the market when you advocate 100% backing. The only system without a barrier to entry which is ENTIRELY consistent with your standards of natural law is FREE BANKING.

  31. Mark has whipped your ass as usual Birdy. How are BASEL requirements barriers to entry but 100% backing requirement is not.

    And you haven’t answered Mark’s question. why do you want to subsidise cheap gold producers? Are you in the pay of Beijing?

  32. Jason,
    Basel need not be capitalised. It is a town in Switzerland. The international banking accords are named after the town.
    Besides which the Accords are a (minor) barrier to entry in that they require some capital to be held against certain, defined, assets. If you are not lending, or lending only to certain entities, you need no capital.

    GMB’s 100% reserve is another order of regulation entirely and, as I have said before, it would be unenforceable without abandoning libertarianism anyway.

  33. So we have INTERNATIONAL WORLDWIDE regulations. Not cartelized that huh?
    You would have to be kidding if you think these aren’t cartel regulations. I thought we were a sovereign country. Now we take our regulations from government and banking bigshots having meetings in Switzerland.

    ” If you are not lending, or lending only to certain entities, you need no capital.”

    Right. So you are blocked out of the banking business. An initiation of force. Whereas 100% backing, as you well know, is merely a clarification of property titles.

    You guys cannot even begin typing without proving my point.

    Andrew don’t help turn this to a thread of doom. You think you have a valid point you ought to take it up at your thread.

  34. I don’t why the 100% backing thing is so important to Graham either. In a free banking FRB scenario the insufficiently-backed banks will likely fail and the ones that get the ratio right won’t. IIRC in one of the Rothbard books he talks about the more stable banks in the free banking era in the US having backings of around 30-40%.

  35. Someone ought to invent a comment feature that automatically shows foaming at the mouth.

    Graeme, is a requirement for seat belts in call manufactured cars the creation of a cartel? I suppose blue cards for building sites, medical degrees for doctors.

    A cartel is an agreement to limit competition. Capital requirements do not do that. I agree that they are a barrier to entry, same as the medical degree, but not a meaningful barrier. You sure are a wiz with definitions.

  36. “Market participants are more disciplined than the Government legally allows them to be, with your so called “Ponzi scheme”. It certainly remains a market despite the regulation politicans heap upon it.”

    You’ve been over this three times and you won’t say what your point is?

    The cartel regulations suit them. When banks move they all move together. I used to get the global limits system sheets and sign off on them. It was that old computer paper with all the holes in it.

    Anyway we had our “overdraught” with the other banks and they had their line of credit with us. We would typically go over our limit into penalty interest territory. They would go over their limit by roughly the same amount. And we didn’t care. Because the retail rate was about the same as the penalty rate. And the interests cross-charged between the banks cancelled out. So it was as if we were charging ourselves. There was no need to go up higher than where we were unless we all moved at once.

    I tell you the truth. That most of the banks of the same weight-division all act like other banks of the same weight division. As if they were all one firm. Your point is meaningless. When the banks create new money its so profitable that pretty soon they can add new capital to their balance sheet and create new capital again. There is no discipline here. There is just a set of rules that help the banks and disproportionately the bigger banks against any competition.

  37. “A cartel is an agreement to limit competition. Capital requirements do not do that. ”

    Yes they do. Andrew just let it slip out. If you want to lend you have to have the capital requirement. Your choice is to be rich already or you cannot play. They are the most flagrant legal barrier to entry imagineable.

  38. “clarification of property titles”

    Isn’t this more a contract issue though? ie, if the bank is clear that it lends out reserves then isn’t it up to the depositor whether the deal is good enough? I’m sure banks that have lower reserve ratios would offer higher rates or some other goodies to entice depositors away from higher reserve ratio banks.

  39. Let me make this point clearer. Capital requirements do not act like discipline on the bigger banks. Only on the smaller in proportion roughly to their market share.

    The reason for this is that new money creation is just fiendishly profitable. Hence you can quickly add alleged capital to your balance sheet if you want to and increase your loan limit. But you can only really do it if the other banks are doing it also. Since you all owe eachother money and the interest you pay to eachother cancels so long as you keep pretty much in line with the others.

    Its the most effective barrier to entry you can think of. Whereas a slowly growing reserve asset ratio would even out the advantage to all players. Pretty soon once you got above 40% you’d have an immense amount of competition coming in from all sides that could compete with the banks. But then because the concentration would be less the RAR would have to be higher to afford the same level of safety. So for this and other reasons one ought to slowly take it all the way to 100%. But by the time you get to 40% you can shed all these capital requirements as you keep raising the RAR.

    And there is the very real possibility of a Michael Dell type character coming out of nowhere and wiping these bigshots out when the ground level RAR is high enough.

  40. “Isn’t this more a contract issue though? ie, if the bank is clear that it lends out reserves then isn’t it up to the depositor whether the deal is good enough?”

    No good. Because money titles are being transferred constantly. And individual peice of gold sitting in a bank in the outback (were this free enterprise) could change hands 100 times in 24 hours. So its by no means simply a contract between you and the bank. If you then transfer your money title to another bank and you are transferring fresh air and zeros, or a diluted title, you are affecting the system entire.

  41. If you then transfer your money title to another bank and you are transferring fresh air and zeros, or a diluted title, you are affecting the system entire.

    WTF. your title isn’t diluted to the money you nincompoop. in the same way the banks wouldn’t individually mark the gold as yours. They would simply put it in a vault with an assigned weight against your name for a future claim.

    unless you are suggesting something else entirely which more resembles a private safe deposit box at a bank that you only have the key to. Is that what you’re suggesting?

  42. What a dope, a small barrier to entry does not limit competition. How many banks are there? How does the capital requirement materially prevent them undercutting on security requirements, interest rates etc?

    I don’t know why anyone bothers.

  43. “Pretty soon once you got above 40% you’d have an immense amount of competition coming in from all sides that could compete with the banks.”

    Wouldn’t slowly raising the RAR requirement in a non-government-guaranteed banking environment work to repel new entrants as the profit motive shrinks?

  44. Actually Pedro, the dill gets this stuff from the truther sites, becomes all excited and then goes around trying to convert people. It’s almost like a religious cult to so there’s no point in arguing.

    there’s is actually very little barriers to set a borrowing and lending firm. there are plenty of shadow banks around or at least there were until a few went broke.

    there’s nothing to stop you from starting the equivalent of a Merrill lynch here other than a few licenses that suggests you’re at least capable of adding and subtracting.

  45. got it in one JC.

    Bird’s idea of a banking system is a safety deposit box. might as well keep your money under a pillow. He disapproves of any contract where there isn’t instantaneous delivery so no, no prostitution, no futures contracts, etc.

  46. yea Jase;
    we would see the return of the goldsmith which would be a guy with a furnace melting ore to some recognized assay and “mark”.

    You would be screwed if you took a trip away. Imagine the weight the plane would have to carry.

    It would a version of Afghanistan where everything is done in cash er gold. Yep, that’s exactly the sort of nirvana I would love to live in.

  47. I’m wondering what people here think of the Austrian Business Cycle Theory? If you are calling graeme an idiot does that mean you are refuting ABCT? Do you think asset bubbles are a bad thing? Are they avoidable? Should the ability (or lack of ability) of banks to protect their own depositors be advertised? I would like to know what theory of economics you subscribe to so I can read about it and find out why it is superior to the Austrian School.

  48. JC – Here’s my gentleman’s bet. This action will cost the country 10% of GDP as a result of reckless lending. That will be our crash.
    It’s actually a backroom feud. The AGWers want 10% of GDP so the Big Business Bastards have launched their own campaign to get at that 10%.
    Meantime Big Nuke’s man in the chair Mr Switkowski is playing both sides against the middle:

    NUCLEAR energy enthusiast Ziggy Switkowski says Australia will need to spend the equivalent of the Prime Minister’s $10 billion rescue package every year until the end of the century to tackle climate change.

    a. Whose side is he on and
    b. How do I get in on this racket?

    I’m not greedy. Just give me 0.1% of this annual 10 bill. I’ll be happy.

  49. The guarantee is for three years not forever. Either APRA works or it doesn’t. If APRA works then the guarantee is of no real consequence, it merely creates something that is understood by the overseas investor and the average Joe.

    There is no doubt the guarantee has already reduced the cost of bank funds, what, do you think the banks reduced mortgage rates because they suddenly developed an Xmass spirit.

    Further, after a credit crunch, getting the banks to lend again is the next big hurdle to get over, the problems suggested by this article are completely disconnected from reality.

  50. I suspect in three years time markets will be more settled, heck in three years we could into our next bubble, my prediction is green energy. The big problem will be increased knowledge.

    I knew the security of out banks accounts depended on the success of APRA ( and they have been pretty good in my view) but I would be willing to bet many small depositors didn’t. Small depositors vote. My money is on the guarantee being wound back to small amounts but not removed.

    Back in the good old days ( like about 18 months ago) the difference between the interest rate for AAA debt and government guaranteed debt was not large. If the markets settle down ( and they will) I don’t see a problem.

  51. Charles

    It’s not the big guys I’m worried about. The little guys are going to build their balance sheets on these cheap deposits and then lend accordingly. How do you figure they can all handle deposits suddenly leaving when the the time falls due?

    Also how to do stop them from taking unwarranted risk? Stop relying on the regulators to save them as they may not be able to.

  52. Mind you JC if I had my way super contributions would go up to 14%, we would then be generating enough capital for our own needs and setting things up to encourage external investment could stop, and lets be honest that is what it was all about.

  53. Ya ok, the regional banks are going to be an issue, it’s going to stop the mergers that should have happened.

    But what is going to happen, if they screw up APRA will force a merger, that is what they have quietly done in the past. Further they know it’s only for three years. They have three years to tidy themselves up or take the US bank option, that is milk the bank and leave the government with the mess. The option taken will be known quickly enough, the salaries paid are part of the annual report.

    But I really can’t see how they will get away with it here, even the regionals are controlled by APRA and they have capital requirements.

    I am wondering what APRA will do about rating agencies, clearly trust has been lost there, do small regional banks have the resources to rate investments themselves, I doubt it. And what happens to Basel 2, it was pushed by the US, faith has been lost there also.

    All in all I really think your off track. It is going to be interesting times, and in my view profitable times.

    Talking about the US nonsense being repeated here ignores how tightly banks are controlled in Australia.

  54. Charles says:
    Mind you JC if I had my way super contributions would go up to 14%, we would then be generating enough capital for our own needs and setting things up to encourage external investment could stop, and lets be honest that is what it was all about.

    No, not necessarily.

  55. Alex,

    This is the BEST advice you will ever get about the Austrian Business Cycle Theory:

    Read Mises and Hayek extensively, and search for similar ideas in the orthodox literature, like Prescott’s work on time inconsistency of central bank policy, rational expectations theory and more recent stuff like Frenkel and Mehrez (2000).

    Ignore Rothbard until you have read Mises and Hayek.

    The ABCT is a fine explanation of mnay business cycles, causitive events leading into economic downturn and so on. But of course as much as it explains a lot of what happens, it doesn’t explain 100% of business cycles or booms and busts.

  56. alex, buy the featured book as well if you haven’t read much. Mises is very easy to read. The warning about Rothbard is because he is the source material for so much of Graeme’s obsession.

    You can understand the role of ABCT without being hung up on fractional reserve.

  57. Alex; Marks advice is good and I wouldn’t question it. The reason I made the suggestion of Ron’s book is that Ron speaks from the standpoint of a guy who despite self educating himself in economics has the respect of some damn good free market people. He talks our language.

  58. Look fellas. He wasn’t asking for your book recommendations. Do some of you think you know more about the Austrian theory of the business cycle. the people giving me a hard time are being total idiots. Thats what he was questioning. He wasn’t soliciting book recommendations.

    Jim. Marks advice is not good. He’s an idiot. Don’t be recommending Mark as some sort of authority on economics. Particularly not Austrian economics.

    What people are after is VALID ARGUMENTS. Not homework. Economics is my background and I actually understand it. So you can always ask me for answers and I won’t usually send you off to buy a book.

  59. Thanks for the book suggestions! 🙂 Of course I am looking for valid arguments but I don’t expect people here would have the time to explain things in great detail for my benefit alone.

    I have read a bit of Rothbard and not so much of anything else so inevitably I will have to read Hayek and Mises to know the full story. But thanks for suggestion of Ron Kitching becuase I know recent, more integrative, works are more likely to answer my questions.

    It seems that FR would be difficult to prevent as it’s really a form of leverage and leverage is inevitable in some form or other. But as for limiting monetary expansion, maybe the real problem is that governments shouldn’t be able to issue debt with future tax revenue as surety; they rely on physical force to see those taxes paid and that’s just not capitalism.

  60. Personally I am more worried about demand management via monetary policy, or selecting the wrong target (quantity as opposed to price), but they can combine together in the most unfortunate way with artificially low rates or unnecessary volatility when a lot of debt is racked up.

    This is basically what we had during the late 1980s and early 1990s in Australia.

  61. A question for the economic literates:

    Do you support or oppose the govt’s bank deposit guarantee?

    I would expect people to be opposed, but I could be wrong.

    If opposed, what is your response to the argument that without a guarantee, Australian banks would face a run on deposits?

    (The non-bank sector’s response was to freeze redemptions, perhaps the banks would do something similar).

  62. 1. No.

    2. The freeze was caused because they didn’t have a guarantee, but the banks did. There was no need for the guarantee, Australian banks are well capitalised.

  63. All this talk of being “well-capitalised” is a total delusion. Since the value of the banks assets is dependent on the continuing expansion of the pyramid-money. The real reason we didn’t need a guarantee was public perceptions. With our banks gouging all our mortgagees on variable-rate-loans no Australians could ever imagine that our banks could be in trouble. But banks are always in trouble. They all run from a position of insolvency.

    We want to de-capitalize some of our banks anyway. Its de-capitalization that would happen if they were subject to competition under conditions of no-one being allowed to pyramid-up on assets.

    You see every-time anyone seems to talk about banks they unwittingly fall into the trap of letting things go the banks way. The banks apparently have to be capitalized or disaster strikes. Imagine if I were able to get away with this silliness? Suppose I said “I have to be capitalized or there will be a disaster.” Suppose I got away with that. Well then you’d all feel inclined to give me cheap loans or outright gifts in order that I might be capitalized.

    How about let us escape this servitude and take a bit more pride in ourselves and not let people steal from us.

  64. Bird of course wants to see the de-capitalization of banks because he wants to see banks no longer lend money but simply act as safety deposit boxes to somehow assuage his unnatural urge to see others not leverage. It’s ok for Bird to leverage of course.

    The banks apparently have to be capitalized or disaster strikes.

    Yea they do, you friggen lunatic. IF they weren’t capitalized they wouldn’t be able to balance their books.


    Liabilities+ equity = Assets.

    Less equity may mean they go broke.

    You don’t even understand basic economics and finance.

  65. But Mark, suppose there was a run on the banks. What then?

    Also, what do you think of the following passage in the Friedmans’ account of the 1907 panic in the US (“Free to Choose” Chapter 3)? It occurred to me that in the current era of electronic banking, customers could pay for just about everything electronically without the need for cash. Thus banks could freeze all cash withdrawals and provided they honoured each others’ transactions, a run could be averted. No?

    “How can a panic be stopped once it is under way, or better yet, how can it be prevented from starting? One way to stop a panic is the method adopted in 1907: a concerted restriction of payments by the banks. Banks stayed open but they agreed with one another that they would not pay cash on demand to depositors. Instead, they operated through bookkeeping entries.

    They honored checks written by one of their own depositors to another by reducing the deposits recorded on their books to the credit of the one and increasing the deposits of the other. For checks written by their depositors to another bank’s depositors, or by another bank’s depositors to their depositors, they operated almost as usual “through the clearinghouse,” that is, by offsetting the checks on other banks received as deposits against the checks on their own hank deposited in other banks.

    The one difference was that any differences between the amount they owed other banks and the amount other banks owed them was settled by a promise to pay instead of, as ordinarily, by the transfer of cash. Banks paid out some currency, not on demand, but to regular customers who needed it for payrolls and similar urgent purposes, and similarly, they received some currency from such regular customers.

    Under this system banks might and did still fail because they were “unsound” banks. They did not fail merely because they could not convert perfectly sound assets into cash. As time passed, panic subsided, confidence in banks was restored, and the banks could resume payment of cash on demand without starting a new series of runs. That is a rather drastic way to stop a panic but it worked.”

  66. To clear out the system at the end of the crisis, they also relied on private credit sourced by JP Morgan from overseas. Essentially the central banking system was built on the premise that the Government could do it better…yet by 1932 they had partially created the Great Depression.

    Here’s the rub with your question: with a totally cashless society, money is kept as deposits when it is spent. There may be no need to freeze cash withdrawals at all.

    Your reading is impressive. Keep it up.

  67. Mark:

    here’s what I think could happen: I commented about this at catallaxy. It is that serious.

    Here’s how bad the global crisis has become.

    If the Japanese don’t stop the appreciation of the Japanese yen against the major currencies we could be days away from a crash of 20+% across the globe.

    I never realized this side swipe as things are moving very quickly and it’s only come to me this weekend after witnessing what has happened in japan/asia over the past few days.

    Japan must stabilize the Yen and change its direction in the next few days and move to zero interest policy asap.

    Japanese investors have been killed over the past few weeks as a result of the yen’s appreciation.

    Yen has moved from 111 to 57 against the Aussie in very short period of time causing huge wealth destruction for Japanese investors overseas.

    As usual with the Japanese they move on everything at glacial speed which means it could be too late.

    Asian investors use the Yen as a marker in terms of when it’s safe to move funds abroad. Recent Yen appreciation will cause them to keep money at home. This means the recycling of savings to current account countries has basically stopped.

    If the Japanese don’t move to intervene tomorrow we could crash.

    That’s my read of things now.

  68. Here seems to be a way to shut GMB up- the last comments at the ‘Newsweek’ thread were not answered! I just pointed out you couldn’t stop individuals inventing FR Banking with their own resources, whether it was good or bad. No reply from anyone!

  69. You are correct Nicholas.

    Because it keeps on happening under freedom to contract and in an evolutionary economics sense, it tends to suggest that it is a good thing for society.

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